Investment advisory firm Fundhouse has made a push for transparency after disclosing how well the funds it advises clients to invest in are performing compared to benchmarks.
The publication comes in response to concerns raised by the Financial Conduct Authority (FCA) that fund rating firms have conflicts of interest, are not regulated enough, and do not provide enough added value.
The watchdog's final report of its asset management market study, published in July, revealed its conclusion that few consultants were able to identify asset managers which provided "better returns to investors".
Fundhouse hopes its analysis, which currently ranks around 50 investment funds in three tiers according to how likely they are to add value over a period of three years, will demonstrate to its customers the added value it can provide.
The analysis revealed that firms with positive ratings - in tiers one and two - outperformed their benchmarks most of the time. Tier one funds - which have the highest chance of adding value - outperformed benchmarks net of fees 67% of the time, while tier two funds - which are also likely to add value but have some issues - outperformed net of fees 53% of the time.
However, for tier three funds, where there is a very low chance of adding value, over four in five (82%) underperformed net of fees.
Yet, the firm warned that relying on peer group comparisons could "flatter" results, noting that tier three funds outperformed compared to their peers 47% of the time.
Co-founder Rory Maguire said benchmarks were a "far tougher hurdle" and comparing to peer groups would misrepresent information to clients.
"The active funds that we suggest to clients, they underperform very tough passive benchmarks," he said. "Yet, if we compare ourselves to peer groups, they make us look like a genius, but we are not.
"The tier three underperform 82% of the time, but outperform peers 47% of the time. We would not have added value by recommending these fund choices [based on peer group comparisons]. We prefer the benchmark net of fees."
Maguire added it was important for funds to take note of the differentiation between benchmark and peer group comparisons, stating multi-asset and fixed income funds often compare to peers.
He also said increased transparency was "imperative", and would provide added value to its end clients.
"The bonus of publishing this information is the end-customer," he said. "Our business model has been disruptive to various industries and if others copied it, it probably wouldn't be that good for us but it would be good for the end-customer.
"We are a ‘principles over profits business' in that respect. If you put the customer first in the market, we think you will have a very sustainable business over a long period of time, and will come out the other side with what should be a win-win for everyone."
The firm also hopes its analysis will, as it assess the three-year track records of more funds over the next few years, help to separate those operating with skill from those relying on luck.
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